Buying Foreclosures with Retirement Funds: 3 Strategies

With hard-to-get financing one of the biggest hurdles involved in a foreclosure purchase, funding those purchases with a retirement account could be an attractive option that helps investors forgo the hassle of traditional financing and also moves their offers to the front of the line.

A self-directed IRA allows investors to buy a property outright or at least provide a sizable down payment using money from their retirement account. These self-directed IRAs can be used to purchase properties in any stage of foreclosure — default, auction or bank-owned — according to experts we interviewed for the October issue of RealtyTrac’s award-winning Foreclosure News Report.

Strategy 1: Buy Short Sales in Default
Veteran real estate investor Stan Brady of Atlanta started using his retirement account to fund property purchases about 12 years ago, after a trip to Washington D.C. where he met with some lawmakers and asked them about raising contribution limits for retirement accounts. They expressed no interest in doing that, so he decided to take matters into his own hands with a self-directed IRA.

“The contributions alone would not be enough to get me where I needed to be for my family,” he said. “It was a footrace to my retirement and security for my children, and I knew that I couldn’t possibly contribute enough to make it work … I needed to speed it up.

Brady identified lists of homeowners in default and in the foreclosure process as one potential goldmine for deals.

“Those are great opportunities for an investor to investigate. Move to the front of the line by making those homeowners an offer before it gets tangled up in the whole foreclosure mess,” he explained. “Say hey, ‘you’re about to lose your house, would you like to sell it?’ And a lot of buyers will take you up on it right there.”

Strategy 2: Buy Homes at Foreclosure Auction
Brady is a client of Equity Trust, a custodian for self-directed IRAs that boasts more than 130,000 clients with approximately $10 billion in assets.

“We’re probably buying and selling 250 properties a week,” said Equity Trust CEO Jeffrey Desich, emphasizing that his company acts as a custodian for its clients’ retirement accounts and does not provide investment advice.

Desich said that investing with a truly self-directed IRA offers two big advantages: diversification of investments and tax benefits. Once an investor learns the ground rules of self-directed IRAs, the possibilities for creative real estate investing — not to mention other investments such as purchasing tax liens or mortgage notes — are many, according to Desich.

As an example Desich provided a possible scenario where an investor purchases a home with a $140,000 mortgage for $70,000 at foreclosure auction — which can be done with a self-directed IRA — and then sells the property back to the former homeowner for $100,000 using seller financing.

“Rather than evict you I’d rather come in and talk to you,” he said, noting that the homeowner gets to stay in the home but is making lower mortgage payments, which go directly back into the investor’s IRA, acting as the bank.

After a few years the homeowner’s credit should be repaired enough to qualify for a conventional loan, which then can pay off the entire mortgage balance to the investor’s IRA.

“(The investor) just made 30 grand plus the interest you paid me over three years on the hundred grand,” Desich explained, noting that the original foreclosing lender also benefits by getting “70 grand upfront” rather than having to deal with foreclosure, eviction, managing and marketing the property for sale.

Strategy 3: Buy Bank-Owned Homes
Lorraine Walls and her husband, Richard, purchased three foreclosed homes on the same street in Lehigh Acres, Fla., in late 2009 using their self-directed IRAs.

“We bought three on the same street because they were all foreclosing at the same time,” said Walls, named 2011 Self-Directed Investor of the Year by Equity Trust.

The income generated by the Walls’ IRA-owned homes flows directly back into their IRAs, as required by the Internal Revenue Service. Any property expenses flow directly out of the IRA, which is just fine with Walls.

“All the bills go to the IRA, all the interest is going to the IRA, and it never affects your household budget,” she said.

Although she and her husband purchased the Lehigh Acres homes primarily for the long-term cash flow, Walls said steady gains in home price appreciation have her rethinking that strategy.

“Actually I’m thinking about selling because the prices have almost doubled in the last two years,” she said, noting that her real estate agent is urging her to list one home in particular. “I paid 58 thousand for this property and he wants to list it for about 105 (thousand).”

Related Article: How to Win the Foreclosure Bidding Wars.

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